Overview of Accounting

Overview of Accounting

By Investors term, accounting is a structural system of recording, reporting and analyzing all the financial transactions of one company or an organization (InvestorWord, 2008). In general, accounting summarizes all the financial activities and data through “income statements, balance sheets, and the statements of cash flows” (Block & Hirt, 2005). The purpose of this paper is to provide the basic information on accounting and finance to the small businesses owners with no accounting or finance knowledge. By providing and presenting the basic concepts of accounting and finance, these small companies will be able to understand the relationships between accounting and finance as well as to apply these two concepts to their own organizations. The financial managers not should understand the relationships of economics, accounting, and finance in order to manage and control all the financial activities successfully only (Block & Hirt, 2005), but they also need to identify all the non-financial information that can be severely impact the company. In order to deliver effectively information regarding small business accounting and finance, this paper will define the audiences, purposes, and natures of financial statements and managerial reports and explain the use of financial accounting information in making informed and ethical business decisions.

Identify the audiences, purposes, and natures of financial statements and managerial reports.

Information differs from business to business based on organization’s types and styles. In order to deliver all the necessary information about accounting and finance, this paper considers some types of audiences: 1/ Sole proprietorships, 2/ Partnerships and 3/ Corporations.

1. Sole proprietorships: this is the most common small organizations with single owner and 10 employees or less. The sole proprietorship represents the single-person ownership and with low organization costs (Block & Hirt, 2005). This type of business has the benefit of making decisions without any consult, which is relatively low cost of running business. However, the drawback of the sole proprietorship can lead to the lack of funding from outside sources, the owner could lose all the invested money in the business as well as personal assets since the financial institutions, and lenders are unwilling to take the risk. In addition, the owner has the responsibility to report income and tax individually.

2. Partnerships: this is small organizations with two or more owners. Usually, all the parties form and sign an agreement in which they will specify and share “the ownership interest, the method for distributing profits and the mean of withdrawing from the partnership” (Block & Hirt, 2005). Liability risks for partnerships are the same as for sole proprietorships except these risks spread more than a single ownership. Partnerships can also consist of limited liability partners who stand to lose nothing more than what they invest in the company but not making decisions. The partners allocate their profits directly and have no double taxation for the taxing purposes.

3. Corporations: this type of business has a number of shareholders with limited liability, even up to millions shareholders such as General Motors (Block & Hirt, 2005). Corporation, forming through articles of incorporation, specifies the right and limitations of shareholders. Therefore, the shareholders are not at risk if the corporation is sued. However, one of the key disadvantages to the corporation is the potential double taxation of earnings (Block & Hirt, 2005).

Different businesses will view the financial statements and managerial report differently. Financial statements provide an entire picture of an organization in both short and long-term conditions. The objectives of financial statements are to provide the information about the financial status, performance, and changes of a company. For example, a person, who wants to invest in a company, would concern about the overall profitability of that company. Another person, who is interested in funding for an organization, would focus on the ability of repaying debt in a timely manner. Financial statements act as a summary of all transactions, which took place within the company, and comprise of income statement, retained earnings statement, cash Flow statement, and balance sheet (Block & Hirt, 2005).

1. Income statement: this is a part of financial statements, which show the financial performance of a company. It shows the profit or loss made by that company during certain period. The income statement shows the amount of money the company took in then adjusts for debts and cost of goods sold.

Net income = revenues – expenses

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